S&OP is a known practice, usually focused on the immediate short-time frame, where Sales and Operations negotiate what to produce.
Much more value can be generated when ideas regarding market opportunities can be truly analyzed, considering the potential throughput (T) and capacity requirements, which include the cost of using overtime, special shifts, temporary workers and outsourcing. I refer to these means of quickly increasing the available capacity, for a certain additional cost (delta-OE), as capacity buffer.
When there is excess capacity throughout all operations we are used to describe this state as “the constraint lies in the market.” In such a situation any additional sale is welcome. Question is how such a situation impacts the sales agents – are they truly compelled to take big moves to bring new clients and new markets, or they still focus on the existing clients, looking for few small opportunities to increase the sales just a bit?
When salespeople come with new ideas, pointing to new market segments, are they being listened to? How are those ideas, which might raise also concerns on top of opening a potential opportunity, checked by top management?
Suppose an idea of packaging several different products together, selling it for a lower price than the simple accumulative price of all the items, is raised. Several questions are immediately raised:
- Selling a package would definitely reduce the sales of the individual items. Question is: by how much? Is the overall total T going up or down? Are there ramifications on the operating-expenses (OE)?
- Is there enough protective capacity to face the new potential demand? If not, can we use the capacity buffer and still gain delta-T>>delta-OE? Or, should we intentionally reduce sales from products that yield less T per the critical capacity they require?
- As no one can accurately forecast the demand for such a new offer – how can we test both the risk of causing a loss and the chance of gaining much more profit? In other words, what are the possible upside and downside of the decision?
The regular S&OP process does not ask these questions. Forecasts are treated as one-number representing reality and the financial impact is supposed to be based on the cost-per-unit. The flaw of such a process lies on the two erroneous concepts, cost-per-unit and one-number-forecast, which lead to wrong decisions and mediocre results, in spite of the good intentions of both Sales and Operations teams.
The real result is that most organizations are stuck with their current clients and market segments and they do very little to make a real move to achieve a leap in the organizational financial performance.
Kiran Kothekar, co-founding director at Vector Consulting Group India, made the following important observation during his presentation at the TOCICO conference, 2016.
Using targets leads to inferior overall performance of the organization!
The rational of the above statement is that targets behave very similar to Parkinson Law. We try to hit the target, but we know better not to try to be above the target, because we don’t like to get higher targets in the future. Another negative ramification is that most targets are for a local area. The derivation of the target is done by considering the overall forecast, but when one of the other parts fails to reach their target, trying to meet the target of the other local areas causes damage. So, hitting targets locally causes problems elsewhere in the organization. For instance, focused efforts to sell specific products in order to hit their target might be on the expense of other sales that are someone else responsibility, or on the expense of future sales. Promotions, carried in order to meet the longer term targets, create massive temporary capacity problems that harm the sales of other products, and reduce the overall Net-Profit = T – OE.
The practical ramification is that setting targets would eventually disrupt any implementation of TOC, no matter the level of benefits already earned. In his presentation Kiran made it clear that using TOC performance measurements as targets would cause the same negatives. I fully agree.
In the mind of management setting targets has a reason: pushing salespersons, operators and middle-level managers to make the required efforts to achieve good results. Without those quantitative measures there is a concern that employees would constantly do less than what they can and should.
Judging whether the performance of an individual, or a whole function, is about right cannot be done by relying on quantitative measurements. There is too high variability and on top of it there are too many dependencies with other individuals, functions and external events. Observing the behavioural patterns is a better way to identify low motivation. Motivating people by encouraging them to raise improvement ideas and treating those ideas seriously by carrying analysis of the impact on the goal is a way to maintain the right culture.
Treating uncertainty calls for using forecasting ranges. Falling below the range should call for analysis, not automatic blaming. Going beyond the range also calls for an analysis. Most of the time the cause is not under or peak performance of someone, but a signal about changing reality that allows us to know a little better, which is the key for handling uncertainty and gaining competitive edge out of it.
I have described the process of ongoing Sales and Operation planning, called DSTOC for decision support based on TOC, in previous posts, which encourages capturing the intuition of salespeople as well as operational people, converting it to ranges, and checking the financial ramifications of the reasonable worst-case and the reasonable best-case. It is not just a way to make sensible decisions under uncertainty; it is also the sensible way to abolish the use of targets to get people do what they know they should do.